Ethical investment in the markets

By Alex Tawanda Magaisa

OVER the last 20 years there has been an upsurge in the growth of Ethical Investment Funds (EIFs) in the large and sophisticated markets of Western Europe, Australia and America.
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The idea of ethical investment falls within the broad framework of corporate social responsibility and is also a key corporate governance issue.


The essence of ethical investment is to encourage companies and investors to take into account the interests of various stakeholders and promote sound and ethical practices to enhance the general welfare of the social environment in which they operate. The aim of EIFs is to promote and recognise ethical business standards so as to make organisations better corporate citizens.


Traditionally, the principal goal of companies and investment funds is to create profits for shareholders and beneficiaries. The critical challenge for managers is to what extent they can deviate from the pursuit of this goal in order to take into account other non-financial considerations. This is already a critical issue in most markets and Zimbabwean companies and investment fund managers will do well to heed the message and stay ahead of the times particularly as they venture into new commercial territories.


The principal actors such as banks and institutional investors have a major role to play in promoting ethical investment in the country. A key idea is that it is possible to profit with principles rather than pursue a conceited approach that ignores the social environment.


The growth of EIFs in itself reveals the development of the movement for the promotion of non-financial considerations in the major markets. EIFs have power because they command an increasingly significant sector of the market. They have the cash which companies seek for capitalisation.

The strategy that they adopt is to encourage companies to adopt sound and ethical practices by targeting their investment only to those companies that demonstrate their willingness and commitment to enhance their ethical standards in business. EIFs come in different forms and target diverse interests. They therefore seek to encourage good corporate practices through their financial incentives to companies that adhere to their demands. In countries where exclusive EIFs have not yet developed, institutional investors have a major role to play.


In Zimbabwe for example, institutional investors control at least 80% of the market. The growth of asset management companies has also contributed to the growth small to medium-sized institutional investors. While there may be a fixation with making quick financial returns to beneficiaries and primary individual investors, those that take the first steps are more likely to stay ahead of the pack. Since they have the financial muscle they have the capacity to influence corporate behaviour.


In 1999 Prudential Assurance Company, one of the UK’s largest institutional investors engaged analysts EIRIS, to analyse and assess the environmental and ethical policies of the companies in which it invests.

According to Prudential’s policy it requires companies in which it invests to disclose and demonstrate in environmental and social policies. Thus ethical investors aim to use their funds ethically by investing in companies that promote good ethical standards. EIFs are creating a potential market for ethical companies to use. It also creates pressure on companies to recognise ethical business standards.


Banks can also have a role to play in enhancing business ethics in the corporate sector. In the UK it was recently reported that one of the largest global banks HSBC was questioned over its lending and practices in respect of companies engaged in the timber industry. Companies in that sector are often accused of encouraging the destruction of the rainforests across the world. The key here is whether a bank can lend money to companies that promote environmental degradation.


Similarly, would a bank be acting ethically when it lends money to a company that is building a dam that destroys the ecosystem and the communities in that area? The idea is that banks can contribute to the promotion of ethical standards by creating lending practices that ensure that the projects they fund do not violate the rights of the people or the environment in which they operate. Indeed banks that follow ethical practices may also build better images of themselves thus attracting good clientele.


Those who perceive the company as merely for the fulfilment of the goals of profit making obviously find it hard to accept the idea of ethical investment as having any practical significance. Why should it be the duty of the company to promote good ethics? The corporate world is increasingly becoming a key stakeholder in the global economy.


Some companies like Coca-Cola, Microsoft, and Nike have bigger economies compared to some countries in the developing world. It has been stated that about 500 biggest companies control at least 25% of the global economy (Goldenberg 1998). In some countries companies have immense control over resources and the economy. The result is that companies have more economic power to control and influence events and the lives of people in many different ways compared to sovereign nations.


Therefore, in as much as it is necessary to ensure that the nation-state plays fair and is sensitive to the communities’ needs, it has also become necessary to ensure that these companies which have so much power and influence be called upon to play roles beyond merely creating profits for the shareholders.


The oil giant Shell was implicated in the human rights violations in Ogoniland in Nigeria in the 1990s. Those events that culminated in the brutal execution of Ken Saro Wiwa and others demonstrated the growing significant impact of corporate behaviour and practices. It has become imperative to ensure that companies must be seen to be doing their best to enhance the welfare of the context within which they operate. They can no longer be ignored as mere economic actors in the marketplace.


In fact through ethical investment funds, certain shareholders themselves are coming together to form powerful coalitions to influence ethical practices.


It has been argued that ethical investment is not necessarily anti-profit making. The key is that investment can still generate profits even if ethical standards are observed.


A bank that has ethical lending policies might benefit from attracting ethical investors and customers. A supermarket chain that promotes good labour standards and encourages its suppliers to promote good welfare for their workers and methods of production might attract more ethically minded customers. Of course this has more impact in societies where consumers are more informed and have greater choice. In countries with poor consumer power other actors such as charities or NGOs might come in and play a significant role.


The naming and shaming of companies that promote poor practices has been used in some markets. NGOs and interest groups in the UK such as Greenpeace, and Oxfam are continually campaigning against companies that promote bad practices across the world. Companies are extremely concerned with protecting their reputations. Therefore watchdogs that threaten to name and shame might have an impact on the way companies behave in the market. The threat of adverse publicity acts as an incentive to encourage them to change their ways. In addition, the availability and growth of the EIFs means that there may be a greater pool of funds available at cheaper prices for companies that promote good ethical practices.


Conversely companies that fail to improve their standards may find accessing capital becoming harder and more expensive. To the extent that such benefits might accrue to ethical companies, the argument is that the pursuance of ethical investment actually enhances value in the end. Of course this is a point of contest but it does not detract from the relevance of good ethical practices.


The definition of good business ethics depends on the particular context and may change according to both time and space. EIFs define good standards according to their own interests and agendas. The differences however do not obscure the reality that companies ought to pursue good practices in one form or another.


A large motorcar manufacturing company has been providing anti-retroviral drugs to employees infected with HIV and Aids. It is not only helping the community’s health needs but also promoting its welfare as it ensures that it maintains a healthy and contented workforce.


In many ways, companies in Zimbabwe can complement the government in meeting the needs of the people. Many companies invest in sports and charity work. There is a danger in thinking that the traditional ways of being involved in the community such as employees donating money to this or that orphanage are enough. That cannot be right. It is important to look at other ways of improving corporate behaviour and attitudes.


Should banks be funding organisations that violate human rights? To what extent should companies donate funds to organisations that encourage the violation of rights and compromise environmental protection? When companies advertise and offer congratulations or condolences in the public media, what sort of individuals or organisations are they associating themselves with? What do shareholders think about this association and implied endorsement of bad behaviour? More importantly, what are ethical investors in those companies doing to demonstrate their disapproval of such corporate actions? These are some of the questions that arise and both companies and investors have to face.


In a way the issue of ethics is at the centre of the dispute over the Homelink service meant to encourage people in the diaspora to send money to Zimbabwe. Some people have raised concern that sending money through that channel only serves the interests of the ruling party and not the people. In a way one might see that as a section that is trying to use the ethical argument in respect of their investment. They may be raising a question as to whether it is ethical to invest in a regime that is not serving their interests.


On the other hand another group would say they owe the government something having benefited from the education and health systems of the past. Either way, one can see that ethical investment issues are not alien to our country and will take an increasing prominence in the near future.


The clever companies will take heed and appoint someone responsible for ethical questions facing the company in order to build ethical investment into the policies and strategic plans of the company. All this is part of the corporate social responsibility that increasingly powerful companies are encouraged to observe. Companies can engage specialists to do social audits to assess their participation as corporate citizens and the strengths and weaknesses of their ethical policies. As we have seen ethical investment and policies are not necessarily inconsistent with profit-generation. After all, it is good corporate governance to promote good business ethics.


Alex Tawanda Magaisa is Baker & McKenzie Lecturer in Corporate & Commercial Law at the University of Nottingham. He can be contacted at alex.magaisa@nottingham.ac.uk.